Q1) Conventional wisdom is that the dividend discount model cannot be used to value a stock that pays low or no dividends. Do you agree with this claim? Explain why. (5 points) Q2) Sinclair Pharmaceuticals, a small drug company, will experience extremely high growth over the next few years and will reinvest all of its earnings in expanding the company over this time. Earnings of $2 per share were just reported and are expected to grow by 30% per year for the next three years. After three years of high growth, it is expected that Sinclair will payout 50% of earnings as dividends for the following 2 years. During these two years, the company will have the same return on new investment. After this time, growth will drop to 5% and is expected to remain at 5% forever. Five years from now Sinclair will pay dividends that are 80% of its earnings. Sinclairs cost of capital is 10%. a) What is the return on new investment over the next 3 years for Sinclair pharmeceuticals? (5 points) b) What should the share price of Sinclair be in 5 years, immediately after paying its dividend? (5 points) c) What is Sinclairs share price today? (5 points) Q3) Youre currently a buy-side analyst working for a big asset manager. You believe that investing in Tesla presents interesting opportunities for your fund: the share price is currently $119, earnings per share (last 12 months) are $4.5, and dividends per share are $1.35. While there is no consensus for the correct price of the stock, analysts agree that the appropriate discount rate for Tesla is 10%. a) A sell-side analyst at a prestigious investment bank estimates that the stock should trade next year for $132, and that dividends should grow by 12%. Using this information, compute the fundamental value of the stock. What do you think her recommendation would be? (5 points) b) A buy-side analyst at a big mutual fund has a different opinion. He thinks that next year dividend will be $1.4 per share, while the dividend in two more years will reach $1.7 per share, at which point the stock could be sold for $145. Using this information, compute the fundamental value of the stock. What do you think his recommendation would be? Explain why. (5 points) c) A seasoned manager at a hedge fund specializing in growth strategies thinks differently. He believes that for a mature stock such as Tesla, growth rate of dividends is consistent. i. According to this assumption, which implicit growth rate of dividends is consistent with the current observed share price? (5 points) ii. Which return on investment does the market estimate in that case? (5 points)

Q4) Consider 2 bonds with identical face value of $100 that pay semiannual coupons. You have the following information: Compute the price of bonds A and B, and for each one explain whether the bond is traded at par, at discount, or at premium. (10 points) Bond Coupon Rate Maturity YTM A 4.0% 5 years 4.0% B 6.0% 10 years 5.0%